What to Watch for in Yellen’s Testimony

Federal Reserve Chairwoman Janet Yellen heads to Capitol Hill this week to deliver her inaugural report to Congress on the economy and monetary policy — her first public remarks since taking the central bank’s helm.

Federal Reserve Chairwoman Janet Yellen

Reuters

Her first stop is the House Financial Services Committee, where she’ll start testifying at 10 a.m. Tuesday. Her prepared remarks will be released at 8:30 a.m., giving lawmakers and investors lots of time to absorb the text before the show gets underway. Day Two of Ms. Yellen’s testimony will be Thursday before the Senate Banking Committee, kicking off at 10:30 a.m.

Here’s what to keep an eye on during the chairwoman’s debut:

Steady as she goes on the taper. Ms. Yellen is likely to signal the Fed remains on course to wind down its bond-buying program this year, even after two months of weak job gains. Fed officials plan to trim the monthly purchases by $10 billion at each policy meeting as long as the economy lives up to their forecasts. If it doesn’t, they could hit pause, but Ms. Yellen is unlikely to suggest such a move during the hearings for a couple of reasons.

First, members of the Fed’s policy-making committee haven’t gathered to discuss the January employment figures. Second, Fed officials will want to see more data before deciding whether to change their economic forecasts and policy path.

What’s up with the labor market? Lawmakers will likely press Ms. Yellen to make sense of recent conflicting signals about the labor market’s health. On the bright side:The unemployment rate has fallen faster than many economists expected, to 6.6% in January. On the cloudier side, that drop is partly because millions of people have left the labor market. Minutes from the Fed’s December meeting showed some officials noting other signs of a still-weak labor market–the low share of people aged 25 to 54 with jobs, the large number of people working part-time who’d rather have full time jobs and the still high level of people who’ve been unemployed for six months or longer. Boston Fed President Eric Rosengren in a speech Thursday said officials should look at broader measures of “underutilization” in labor markets that are historically high, such as the Labor Department’s “U-6” rate – which includes people working part-time for economic reasons as well as discouraged workers who’ve stopped looking for work but would still like a job. If Ms. Yellen points to the same kinds of indicators, it will show she has similar concerns.

The fate of the 6.5% threshold? The tumbling unemployment rate presents a communications challenge for the Fed. Since December 2012, the central bank has said it won’t consider raising short-term rates from near zero until the jobless rate reaches 6.5%. As that threshold approaches, officials have begun to point to other indicators of slack in the labor market to justify their plans to keep rates low “well past” the time the jobless rate hits 6.5%. It’s unclear what the Fed will say about the 6.5% threshold once it’s crossed. Ms. Yellen may not want to say much more about the matter because it’s under internal debate. But listen for what she doesn’t say: Some officials want the Fed to move the threshold lower, say to 6%, but so far most policy makers haven’t embraced the idea. If she doesn’t mention that possibility, it suggests she’s not such a big fan, either.

What about the emerging markets? The Fed didn’t make a peep about the turmoil rocking emerging markets in its January policy statement, but they’re definitely paying attention. Ms. Yellen is unlikely to signal that trouble abroad will sway the Fed’s plans. There is scant evidence so far that the financial problems in countries such as India, South Africa and Turkey will impact the U.S. economy – and the Fed’s job is to care about the domestic economy. The Fed has built a new apparatus for monitoring risks to financial stability and she may discuss the channels by which emerging market woes could be transmitted here.

Expect a lot of questions about regulation. During her Senate confirmation hearing, Ms. Yellen got as many, if not more, questions about the Fed’s regulatory powers than she did about the economy and monetary policy. This week, lawmakers on both panels are likely to grill her on whether the Fed and other regulators need to do more to ensure big U.S. banks won’t need taxpayer bailouts the next time financial trouble strikes. She’s also likely to be pressed on how the Fed and four other regulators in charge of the so-called Volcker rule plan to enforce it in a coordinated manner. Lawmakers from both parties have raised concerns that the complex measure to prevent banks from engaging in certain trading activities will be applied unevenly by different regulators.

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